August 27, 2010

Predatory Pricing Practices and the Toy Industry

Gerrick Johnson of BMO Capital Markets (a lovely fellow by the way, you should have the pleasure of making his acquaintance) is a keen observer and a fan of the toy industry. Recently he reported that Walmart's pricing is less aggressive than we have seen in recent years, which is good news.

Walmart typically sells promotable products below their cost, as a loss leader to draw in customers. Such below-cost selling of highly promoted products is negative in several ways:

1. It gives the consumer an unrealistic expectatation of what toys of that sort should sell for, perhaps making them less willing to pay the normal price for other toys where the retailer margin is included in the retail price. That unrealistic expectation of what a toy should cost can carry over in the consumers' minds to other product categories, and perhaps into the following year, causing them resist purchases of toys at normal retail prices. This can have long term negative effects on toy sales.

2. Let’s see, what was 2? Oh, right! Predatory pricing forces other retailers to also sell at a loss, OR cancel orders for that promotable product because they cannot compete with the artificially low price that has been set. The end result is that the toys will ultimately sell fewer units because Walmart will be the only game in town selling it. The toy manufacturers and even the inventors suffer.

Do you have any thoughts on other negative consequences of predatory, below wholesale, and loss leader selling of lead promotable toy products? I'm sure there are more unintended consequences. Thankfully, so far this year the above seems not to be happening, and that is a good thing. So far.

Comments

This is a growing problem with selling on Amazon.com for 3rd party merchants. A simple lesson in microeconomics for numerous 3rd party merchants would make everyone happier, and allow everyone to sell more, including suppliers. Unfortunately, not all merchants are educated in being able to find the optimal price point for their products.

You are absolutely right. How do sellers learn that to undercut to sell is a slippery slope that all will slide down together?
Amazon and others may be the ones to help educate their sellers on wise pricing practices.
What do you suggest?
Thank you.

I'm glad you posted this piece, Bruce. I'm very curious about Walmart's plans. I attended several Webinar's run by the Renewable Choice. They consulted with Walmart and are helping suppliers become compliant with Walmart's Sustainability Scorecard supplier rating system. According to Renewable Choice, Walmart has a very ambitious plan for reducing waste, carbon footprints, etc. and will be holding suppliers accountable—buyers will be rewarded for purchasing from manufacturers that have a higher sustainability rating.

Has anyone determined how this effort is coming along and how it might affect pricing?